I’m just catching up on a swarm of recent cases filed against Mortgage Electronic Registration Systems, Inc. (MERS), the privately owned mortgage registry that has, for some time now, been used by the mortgage industry in lieu of municipal recording systems (which were generally voluntary anyway). Gretchen Morgenson described the rationale for MERS in 2009:
For centuries, when a property changed hands, the transaction was submitted to county clerks who recorded it and filed it away. These records ensured that the history of a property’s ownership was complete and that the priority of multiple liens placed on the property — a mortgage and a home equity loan, for example — was accurate.
During the mortgage lending spree, however, home loans changed hands constantly. Those that ended up packaged inside of mortgage pools, for instance, were often involved in a dizzying series of transactions.
To avoid the costs and complexity of tracking all these exchanges, Fannie Mae, Freddie Mac and the mortgage industry set up MERS to record loan assignments electronically. This company didn’t own the mortgages it registered, but it was listed in public records either as a nominee for the actual owner of the note or as the original mortgage holder.
MERS has been accused, as Mortgenson noted, of keeping sloppy records about mortgage assignments, especially in cases when it tried to assert the rights of a foreclosing mortgagee without a record of an assignment of those rights.
Apparently, there has been a number of recent legal actions against the company, and these lawsuits fall into two categories. First, cities and counties are suing MERS alleging it was unjustly enriched because, by skipping public registration, it did not pay local recording fees. MERS has successfully defended itself against these challenges in at least five state so far, and Illinois may be next. The other lawsuits have been filed by foreclosed homeowners, alleging fraud and title claims, and MERS has been winning those cases as well.
A few years ago, in 2011, things did not look quite so rosy for MERS. At that time, Morgenson and Michael Powell wrote in the New York Times that MERS had been losing its court battles:
The Arkansas Supreme Court ruled last year that MERS could no longer file foreclosure proceedings there, because it does not actually make or service any loans. Last month in Utah, a local judge made the no-less-striking decision to let a homeowner rip up his mortgage and walk away debt-free. MERS had claimed ownership of the mortgage, but the judge did not recognize its legal standing.
And, on Long Island, a federal bankruptcy judge ruled in February that MERS could no longer act as an “agent” for the owners of mortgage notes. He acknowledged that his decision could erode the foundation of the mortgage business.
I plan to cover these cases more in depth later, but as a final note, I’d like to remind readers that MERS is not only in the mortgage registration game; it also has a system for registering vacant properties. I’ve warned before on this blog that municipalities might want to be cautious about partnering with an entity so closely linked to the mortgage industry, particularly when the municipality is seeking to hold mortgage companies responsible for maintaining vacant properties. I also made this warning in an article published in the Real Estate Law Journal, which retraces the history of MERS involvement with vacant property registration. I conclude with that discussion: Continue reading “New lawsuits against MERS”